Work for Us – Or Else: The Rise of Noncompete Contracts

It's now common, even for lower-paying jobs, to make employees pledge their loyalty to companies. Some states are stepping in to stop the corporate abuse.

The idea that a company has a vested interest in keeping its employees around is a very old one. In medieval times, master craftsmen demanded that apprentices stay on the job for a certain period of time, so the boss didn’t waste his investment in training. Nowadays, it’s commonly accepted that businesses built on intellectual property, such as technology or law, stand to lose much of their value if a rival firm poaches key employees.

But some companies have taken the idea of demanding loyalty a bit too far. They are forcing workers at all levels of the business to sign noncompete agreements, barring them from leaving to join another company in the same field for a specified period of years. Those contracts may be defensible for the head of research at a pharmaceutical company, or even a top-flight software engineer, but sandwich makers, yoga instructors and summer camp counselors have also been prevented from jumping to competitors. “The noncompetes in my opinion are a little broad and overly protective,” says Evan Starr, a management professor at the University of Maryland. “If only CEOs were signing these, I don’t think anybody would care about it.”

Starr and a pair of colleagues from the University of Michigan recently performed the first large-scale survey regarding noncompetes. They found that the practice is pervasive, with nearly 40 percent of workers having signed one over the course of their careers. About 1 in 5 workers is currently subject to such agreements, including employees in low-skilled jobs with seemingly no intellectual property or advanced training involved. Last year, facing legal complaints from state attorneys general, the sandwich chain Jimmy John’s agreed to end its practice of having delivery drivers and store staff sign noncompete agreements.

Several states have now moved to make the corporate abuse of these devices illegal. Hawaii limits noncompete agreements solely to tech workers, while New Mexico allows them only in health care. Illinois has prohibited the agreements for people whose earnings are close to minimum wage. In Oregon, companies are proscribed from asking anyone to sign a noncompete within two weeks of a job’s starting date. This is to prevent companies from presenting contracts to workers on their first day who feel they can’t refuse to sign at that point, having turned down other offers or possibly relocated to take the job.

Business groups argue that employers have legitimate concerns about workers stealing trade secrets or taking away clients. That’s not easy to envision in the case of a sandwich maker. Besides, there are other ways firms can protect those interests. They can use nonsolicitation agreements that simply block employees from walking away with client lists. That sort of narrower approach may better balance the interests of employers and employees than broader noncompetes, which can have the effect of handcuffing unhappy workers to a company indefinitely.

One continuing problem, however, is the failure of companies to let workers know what their rights are when it comes to noncompete contracts. This happens in states that regulate the contracts as well as in states that don’t. “The use of noncompetes is just as high in states that don’t enforce them, like California, as states that enforce them vigorously, like Florida,” says Starr.

Once a contract is signed, an unhappy employee may believe she’s already bargained away her right to pursue a similar job, even if there’s a law meant to protect her. “We shouldn’t be making it harder for anyone to get a job,” says Jack Franks, who co-sponsored the Illinois legislation, “especially low-wage workers, whose jobs have the highest turnover.”